Oil may see bear hug, bullion gets ready for a rally

By Pritam Kumar Patnaik

This week, we witnessed extreme volatility in crude prices, which ended with losses after two weeks of gains. NYMEX October contract fell by over 2.5 per cent while the Brent November contract fell by over 1.2 per cent this week.

Domestic September contract also corrected by over 1.5 per cent this week, tracking weak overseas prices. However, prices had surged higher initially as the rupee continued its downward spiral, depreciating by almost 2 per cent over the week.

Crude prices started the week on an upbeat note after two Gulf of Mexico oil platforms were evacuated in preparation for hurricane Gordon. However, after the initial fear of the storm subsided, prices corrected as emerging market woes weighed on sentiment. A deadline neared for a potential new round of US tariffs on another $200 billion of Chinese goods.

Additionally, data on Thursday showed gasoline and distillates inventories rose unexpectedly over the week, overshadowing a bullish drawdown in crude.

The question now on everybody’s mind is how much Iranian oil will be lost after November 4, 2018, when the second round of sanctions kicks in. If it is around 1 million bpd or more, as expected, the fragile supply-demand balance will be upset and oil prices will stay supported.

OPEC on Wednesday said it expected global oil demand to break through 100 million bpd for the first time this year. A further risk is seen in OPEC member Venezuela, where a government and political crisis has halved oil production in the past two years to a little more than 1 million bpd. This could continue to limit downside of crude prices.

Technically, on the domestic front, MCX Crude September Futures had a volatile week in which prices moved higher towards Rs 5,114 level and post that sharp reversal on downside towards Rs 4,828 level was witnessed. This is indicating that retracement of the prior rise is ongoing. Hence, near term trend can remain sideways to negative with Rs 5,100 as medium term resistance.

On the weekly chart, it has formed a huge spike on the upside, which indicates bears have an upper hand for now. On hourly charts, the 20-period EMA is acting as resistance and hence, as long as Rs 4,975 is intact on the upside, trend will remain on the downside over the short term. Major support is placed at Rs 4,730 levels.

Bullion
International bullion prices were trading lower on Friday and were on the verge of a weak ending. However, prices rebounded from lows on the back of short covering and slightly lower dollar.

The prices started on a weaker note as the dollar held near a one-week high on worries over an escalation in trade conflicts between the US and other countries.

US President Donald Trump said there was no need to keep Canada in the North American Free Trade Agreement and warned Congress not to meddle with negotiations or he would terminate the trilateral pact, which also includes Mexico.

Meanwhile, Bloomberg News reported that Trump was prepared to ramp up a trade war with China and had told aides that he was ready to impose tariffs on $200 billion more in Chinese imports as soon as a public comment period on the plan ended.

Additionally, hedge funds and money managers cut their net short positions in COMEX gold contracts in the week to August 28 for the first time in more than a month, US Commodity Futures Trading Commission data showed. Gold speculators cut their net short position by 9,126 contracts, bringing it to 69,453.

Meanwhile, investors continued to exit from the ETF fund. A 4.9 million-ounce drop in the holdings of gold-backed exchange traded funds has also pressured the price of gold since late May.

However, after a drop below the $1,200 mark to test a low of $1,189 for the week, gold prices rebounded towards the $1,200 on the back of slightly weaker dollar.

The dollar fell against the euro and the pound sterling mid-week after a report that Germany would be ready to accept a less detailed agreement on the UK's future economic and trade ties with the EU in a bid to get a Brexit deal done.

Looking ahead, we believe that such negative positioning could mean that speculators may struggle to push prices much lower. However, without a weaker dollar, gold would find it difficult to rise.

Trade concerns continue to support the greenback, with a deadline gone in the US-China trade dispute and a refusal by Canada to bow to key US demands in its trade talks with Washington.

On the domestic side, overseas gold prices found support amid physical buying from Asia.

Indian gold prices rose this week by almost 1.5 per cent on the back of firm demand and weak currency. Reports of RBI purchasing gold also supported prices. Data from RBI’s annual report showed that the central bank has bought gold for the first time in nearly a decade, signalling that the metal could be in demand as a store of value when returns and capital values of fixed-income bonds are declining in a rising rate environment.

India's gold imports more than doubled in August to hit their highest level in 15 months as lower prices prompted manufacturers to replenish inventory for a jewellery exhibition, provisional data from metals consultancy GFMS showed. Imports jumped by 116.5 per cent to 100 MT last month. However, gold imports in September would likely moderate as gold prices have rebounded over the last few days due to a depreciating rupee. However, from October, imports would again revive due to the festivals.

Technically, on the domestic front, MCX Gold October futures continued to rise for the third consecutive week and made a high of Rs 30,700 level recently. On a weekly basis, it has gained around 2.10 per cent from the low of Rs 30,070 level. It has made bullish candlestick pattern, which indicates that bulls have the upper hand.

USD-INR depreciation is also supporting gold prices and hence, the trend remains on the upside. On daily charts, 10-day exponential moving average is sustaining above 20-day EMA and the rally is ongoing with strong momentum.

Now, Rs 30,100 looks very important support on the downside. On the upside, prices are expected to move higher towards Rs 31,100 levels. For the last few days, open interest has been increasing, which now stands at 9,089 contracts, from 7,990, which was seen earlier. This is also a bullish sign for prices.

(Pritam Kumar Patnaik of Reliance Commodities analyses outlook for various commodities)